Concept of Total Product, Average Product and Marginal Product And Production Function

Concept of Total, Average and Marginal Product

A product can be thought of in three ways. As follows:

Total Product (TP): It describes the overall quantity of goods produced over the course of a specific time period using all of the inputs. There are two ways to calculate it:

• Multiplying the average product with the total units of the inputs employed, i.e. TP = AP×N; where, TP= Total Product, AP= Average Product, N= Total units of inputs employed
• Summation of marginal products, i.e. TP=∑MP where, TP= Total Product, MP= Marginal Product

Average Product (AP): The result of dividing the entire product by the total units of the input used is an average product. It speaks of the output for every unit of input. Mathematically, AP= TP/N where, AP= Average Product  TP= Total Product N= Total units of inputs employed.

Marginal Product (MP): It is the addition made to the total product by employing one more unit of the input. In other words, it is the ratio of the change in the total product with the change in the units of the input. It is expressed as:

MP = ΔTP/ΔN where, MP= Marginal Product ΔTP= Change in total product ΔN= Change in units of input. It is also expressed as MP = TP(n) – TP(n-1) where, MP= Marginal Product TP(n)= Total product after employing one more unit (nth unit) TP(n-1)= Total product before employing one more unit.

Production Function

In order to produce output, the manufacturing process uses a variety of inputs or factor services. To put it another way, a business organization turns inputs into output. The means of creating the commodities and services that society demands are known as inputs. Land, labor, capital, and organization are the four main components of production.

According to A. Koutosoyianis, “The production function is purely a technical relation which connects factors inputs and output.” 

Production function generally refers to the functional relationship between inputs (as an independent variable) and output (as a dependent variable). In other words, production function is the relationship between a factor of production and the number of commodities produced. For instance, to grow wheat, a farm needs land, manpower, seeds, fertilizer, spades, and tractors. It is, in essence, a timeline that specifies how much output will be produced from various combinations of inputs given the current state of technology over a specified amount of time. Mathematically, it is expressed as Q= f(N) where, Q=output, f=function, N=Inputs

Basic Concepts

There are several fundamental ideas behind how production works.

• A functional relationship between inputs (as an independent variable) and output is established by the production function (as a dependent variable).
• A flow of inputs leading to a flow of output over a predetermined time period is the production function.
• Because the inputs and outputs are both described in physical terms, it expresses a physical relationship.
• It describes a relationship between input and output that is entirely technological.

Types of Production Function

The production function is of two types. They are:

Short run production function:

A time during which at least one input from the factors of production stays constant is referred to as the short run. Market supply cannot be altered in response to a shift in market demand. In the near term, factory land, buildings, and machinery are often fixed, but the demand for labor, raw materials, and other manufacturing components can change the market supply.

The two types of inputs in a short run are fixed inputs and variable inputs. The inputs that cannot be changed as needed are known as fixed inputs. For instance, land, a building, full-time employees, etc. However, variable inputs are ones that can be changed as needed. Raw materials, delivery personnel, etc. are a few examples.

• Fixed Costs: The manufacturing cost of an investment that the company uses is referred to as a fixed cost. Despite the production output, the fixed cost remains constant. Examples include administrative expenses, property taxes, office and building rent, amortization, and interest.
• Variable Cost: The cost of direct labor, raw materials, supplies, and materials is shown below. The production of goods is linked to the variable cost.

The functional connection between the units of variable components and the output is referred to as the short run production function. In the short run production function, we maintain all other inputs constant while examining the impact of a change in the quantity of one variable input on the output. Single variable production function is another name for it. Written algebraically as:

Q= f(Nvf)K’ where, Q=Output, f=function, Nvf=Quantity of variable factors, K’=Constant units of fixed inputs

Long run production function:

Long run is a time frame during which market supply may be altered in response to shifting market demand. This is so that the manufacturer has enough time to change all the inputs as necessary. In actuality, throughout time, all of the inputs are flexible and changing. In the long run, businesses are able to employ more capital and labor. The scale of production increases when factor inputs are employed more frequently. In order to expand output of a commodity over the long term, more units of each input must be used. Long-term, the rules of returns to scale provide a clear explanation for the function relationship between factor inputs and output produced with varying scales. In economics, the isoquant approach is typically used to explain the laws of returns to scale.

The functional relationship between the amounts of all inputs and outputs is thus referred to as the long run production function. In a long-run production function, we investigate the impact of changing all inputs, such as land, labor, capital, and entrepreneurs, on the final product. As a result, the phrase "multivariable production function" is also used to describe the long run production function. In algebra, it is written as:

• Q=f(W,L,K,M,T) where, Q=output, f=function, W=Land, L=Labor, K=Capital, M=Management, T=Technology
• Long run production function is also depicted as production function with two variable inputs, i.e. Q=f(L, K)  where, Q=output, F=function, L=Labor, K=Capital

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan